A secured lender assumes it enjoys a priority position in the event of a bankruptcy filing by one of its debtors, and rightly so. However, a lender might find that priority position canceled by the bankruptcy court unless it can present clear evidence of future solvency. The only effective means for a lender to protect its secured position in the event of a debtor’s bankruptcy is with a solvency opinion.
In the past, accounting firms were permitted to issue solvency letters, but that is no longer the case. Accounting analyses using “agreed-upon procedures” and historical performance review do not meet the test of clear and convincing evidence of future solvency now demanded by the bankruptcy court.
In contrast, the solvency opinions provided by Appraisal Economics represent the kind of detailed analysis of critical financial variables the court requires. Our primary focus is to demonstrate a sufficient cash flow to operate the business and service debt, even under adverse conditions. Not coincidentally, that is also the bankruptcy court’s focus.
As part of our analysis we conduct a detailed review of critical business risks, contingent liabilities, and the market value of assets. Among the resolutions that our completed solvency opinions reach are:
- That the fair market value of the company’s assets would exceed its stated liabilities and identified contingent liabilities
- That the company would be “able to pay its debts as they became absolute and mature”
- That the capital remaining in the company would be reasonable for the business in which it is engaged
Appraisal Economics has provided clients with solvency opinions covering a wide variety of circumstances–from the $800 million acquisition of an international scientific instruments manufacturer to deals involving the acquisitions of a cosmetics company, an automotive parts chain and a sporting goods retailer.
Please take a moment to learn more about all of the business valuation services available from Appraisal Economic, including international transfer pricing and tax planning, power plant valuations and much more. For more information about our solvency opinions and fairness opinions, please contact us today.